If I had £1 for every time someone insisted that investing in the stock market is just gambling, I’d easily have enough to take a nice foreign holiday.
I’ve been investing in stocks and shares for over 35 years, so I’ve heard this opinion more times than I can remember. Yet for many serious investors I know, the stock market has become their #1 source of wealth — right up there with buying a home.
Investing isn’t gambling
I firmly believe that investing in shares for the long term couldn’t be more different than, say, buying a lottery ticket or placing a bet on a sports team to win.
The key reason is that all gambles come with a built-in ‘negative expectation’. For example, I don’t buy National Lottery tickets and scratchcards, because only half of ticket sales is returned as prizes. In other words, the Lotto’s negative expectation is 50%. That’s a terrible gamble at awful odds.
Likewise, bookmakers calculate their odds on, say, sporting events such that they usually have a small (typically, 2% to 10%) positive return for themselves. In this scenario, perfectly balanced betting books guarantee positive returns to bookies.
To sum up, gambling usually involves betting on a single event, often with the odds heavily stacked against punters. And that’s just not how the stock market works.
The stock market isn’t a lottery
Of course, it’s possible to treat the stock market like a casino by making big, bold bets on particular outcomes. At times, I’ve done this myself, backing my hunches with large slices of my wealth — often with mixed results. These days, I’d argue that I was actually trading or speculating, but not investing.
Here’s how legendary US fund manager Peter Lynch summed up my current thinking: “A share is not a lottery ticket…it’s part-ownership of a business.” In other words, when I buy a stake in a listed company, I become one of many owners of that operation. And if the business does well and thrives, then I stand to benefit in future as a shareholder. So all I need do is find the right companies (or stock markets) to invest in, right?
We bet big on America. Now we’re betting on the UK
For decades, I used to pick and choose my own shares. But as our portfolio grew, my wife and I moved to investing in low-cost funds with broad exposure to core markets. And from 2009 to 2021, we bet heavily on the American stock market by buying US index-tracking funds. This produced life-changing returns for us, but then the US market crashed hard in 2022.
In late 2021, I repeatedly warned that — in my view — US stocks were overpriced and doomed to fall. So we stopped investing in American stocks and, instead, started to buy UK shares at low prices. And I’m very glad we did, because the US stock market is down heavily this year, while the UK’s FTSE 100 index has held up rather well in this global turmoil.
Finally, by investing regularly, we smooth out the stock market’s inevitable ups and downs. Also, we aim to invest for the long term (say, 10+ years from now). And this ‘time in the market’ turns investing into the best positive-expectation ‘bet’ that I’ve ever found!